Universal Electronics(UEIC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Universal Electronics Inc.'s unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, are presented for periods ending September 30, 2020 Consolidated Balance Sheets Total assets decreased to $508.6 million from $564.2 million at December 31, 2019, primarily due to reductions in inventories and accounts payable, while total stockholders' equity increased to $296.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $67,146 | $74,302 | | Inventories | $115,750 | $145,135 | | Total current assets | $329,824 | $378,752 | | Total assets | $508,617 | $564,159 | | Line of credit | $50,000 | $68,000 | | Total liabilities | $212,062 | $289,760 | | Total stockholders' equity | $296,555 | $274,399 | Consolidated Statements of Operations Q3 2020 net sales decreased to $153.5 million, but operating income increased to $10.2 million, and net income more than doubled to $6.2 million year-over-year, with a significant swing to $26.4 million net income for the nine-month period Q3 2020 vs Q3 2019 Performance (in thousands, except per share) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Net sales | $153,505 | $200,724 | | Gross profit | $44,156 | $46,479 | | Operating income | $10,246 | $6,127 | | Net income | $6,168 | $2,669 | | Diluted EPS | $0.43 | $0.19 | Nine Months 2020 vs 2019 Performance (in thousands, except per share) | Metric | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | | Net sales | $458,416 | $578,783 | | Operating income | $24,752 | $3,864 | | Net income (loss) | $26,414 | $(3,397) | | Diluted EPS (loss) | $1.86 | $(0.25) | - An accrued social insurance adjustment of $9.5 million was recorded in the first nine months of 2020, significantly boosting income before taxes[10] Consolidated Comprehensive Income (Loss) Statements Comprehensive income for Q3 2020 significantly improved to $11.2 million from a $2.8 million comprehensive loss in Q3 2019, driven by higher net income and a positive foreign currency translation adjustment of $5.0 million Comprehensive Income (Loss) (in thousands) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $6,168 | $2,669 | $26,414 | $(3,397) | | Foreign currency translation | $5,005 | $(5,457) | $(2,774) | $(5,557) | | Comprehensive income (loss) | $11,173 | $(2,788) | $23,640 | $(8,954) | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $296.6 million by September 30, 2020, primarily due to $26.4 million net income, partially offset by $9.8 million in treasury stock purchases and a negative currency translation adjustment of $2.8 million for the nine-month period - Key drivers of the change in stockholders' equity during the first nine months of 2020 included net income, currency translation adjustments, and the purchase of treasury shares[15] Consolidated Statements of Cash Flows Net cash provided by operating activities was $43.8 million for the nine months ended September 30, 2020, with net cash used in investing and financing activities leading to a $7.2 million net decrease in cash Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $43,827 | $39,921 | | Net cash used for investing activities | $(16,618) | $(17,359) | | Net cash used for financing activities | $(30,913) | $(19,081) | | Net decrease in cash | $(7,156) | $1,522 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, customer concentration, legal proceedings, and other key aspects of the financial statements, highlighting Comcast Corporation as a major customer and ongoing patent litigation with Roku, Inc - The COVID-19 pandemic has created uncertainties that may impact the company's estimates, judgments, and the carrying values of assets and liabilities, though no specific updates were required as of the report date[24] Net Sales by Major Customer (>10%) | Customer | Q3 2020 % of Sales | Nine Months 2020 % of Sales | | :--- | :--- | :--- | | Comcast Corporation | 21.2% | 20.7% | | Sony Corporation | 10.4% | N/A | - The company is engaged in multiple legal actions against Roku, Inc and others, alleging patent infringement, and has filed a complaint with the International Trade Commission (ITC)[75][76][78] - In June 2020, the company reversed an accrued social insurance liability of approximately $9.5 million related to its sold Guangzhou entity as an indemnification period expired[70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 23.5% decrease in Q3 2020 net sales to $153.5 million due to COVID-19, offset by improved gross margin of 28.8% and increased operating income of $10.2 million, with sufficient liquidity maintained - The COVID-19 pandemic negatively impacted sales demand and caused supply chain disruptions, and the company expects this negative impact on sales to continue for the remainder of 2020[122][129] Q3 2020 vs Q3 2019 Results Summary | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $153.5M | $200.7M | -23.5% | | Gross Margin % | 28.8% | 23.2% | +5.6 p.p. | | Operating Income | $10.2M | $6.1M | +67.2% | - Gross margin improvement was driven by reduced U.S. tariff expense, better operational efficiency at the Mexico facility, and increased royalty revenue[130] - SG&A expenses decreased from $32.4 million to $26.2 million in Q3 year-over-year, primarily due to lower incentive compensation, reduced contingent consideration, and discretionary spending cuts related to COVID-19[132] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign currency fluctuations, particularly with the Chinese Yuan Renminbi, and uses foreign currency exchange contracts to mitigate some of this risk - A 100 basis point increase in interest rates would have an approximate annual impact of $0.4 million on net income based on the outstanding credit line balance at September 30, 2020[163] - The most significant foreign currency exposure is to the Chinese Yuan Renminbi, as it is the functional currency for its China-based factories, where a strengthening Yuan increases manufacturing costs[165] - Management estimates that a 10% fluctuation in key foreign currency exchange rates relative to the U.S. Dollar would impact Q4 2020 net income by approximately $6.6 million[168] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the third quarter - The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[170] - No changes occurred in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[171] PART II. OTHER INFORMATION Legal Proceedings This section incorporates by reference the discussion of ongoing litigation matters from Note 11 of the financial statements, detailing patent infringement lawsuits against Roku, Inc. and other entities - The company is subject to various lawsuits arising from its business operations, with detailed information on these matters provided in Note 11 of the Notes to Consolidated Financial Statements[172] Risk Factors The COVID-19 pandemic is a primary risk factor, having negatively impacted sales and posing ongoing risks to business operations, financial condition, and supply chains - The COVID-19 pandemic is a primary risk factor, having negatively impacted sales volumes in the first nine months of 2020 and is expected to continue posing risks to business operations, financial condition, and cash flows[174] - Potential effects of the pandemic include reduced consumer confidence, disruptions in manufacturing and supply chains, and the weakening financial position of some customers[176] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company repurchased 90,890 shares for approximately $3.4 million, and a new share repurchase program for up to 500,000 shares was approved effective November 10, 2020 Stock Repurchases (Q3 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2020 | 625 | $46.29 | | August 2020 | 3,317 | $45.30 | | September 2020 | 86,948 | $37.23 | | Total | 90,890 | $37.59 | - On October 28, 2020, the Board terminated the September 2020 repurchase program and replaced it with a new program, effective November 10, 2020, to repurchase up to 500,000 shares[86][177] Exhibits This section lists the exhibits filed with the Form 10-Q, including required certifications by the Chief Executive Officer and Chief Financial Officer and Inline XBRL documents - Exhibits filed with this report include Rule 13a-14(a) and Section 1350 certifications from the CEO and CFO, as well as Inline XBRL data files[179] Signatures The report is duly signed on behalf of Universal Electronics Inc. by its Chief Financial Officer, Bryan M. Hackworth, on November 5, 2020 - The Form 10-Q was signed on November 5, 2020, by Bryan M. Hackworth, Chief Financial Officer[183]